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    Jun. 8, 2023

Agency Power and Adjudication: The Government Seeks Supreme Court Review of Jarkesy v. SEC

In May 2022, the U.S. Court of Appeals for the Fifth Circuit decided Jarkesy v. SEC, holding that SEC enforcement proceedings before an administrative law judge were unconstitutional on three separate grounds. Jarkesy therefore threatened a key avenue the SEC regularly pursues to enforce the securities laws. As a result, the SEC has petitioned the U.S. Supreme Court (Court) to reverse the Fifth Circuit’s decision. If the Court takes the appeal and upholds the Fifth Circuit’s decision, it could entirely reshape the SEC’s enforcement priorities going forward. This guest article by MoloLamken attorneys Eric Nitz, Catherine Martinez and Christian Ronald summarizes the Fifth Circuit’s decision, examines the SEC’s pending petition before the Court and forecasts the decision’s impact on future SEC enforcement efforts against private fund managers if the Court takes the case. For additional commentary from MoloLamken attorneys, see “How Fund Managers Can Handle Insider Trading Risks After U.S. v. Chow” (Jun. 24, 2021).

New York Updated Its Model Sexual Harassment Policy and Training Materials

On April 11, 2023, New York Governor Kathy Hochul announced that the New York State Department of Labor, in collaboration with the New York State Division of Human Rights, had revised the state’s Sexual Harassment Prevention Model Policy and associated training materials, which it first adopted in 2018. The revisions broaden the concept of harassment to cover gender identity and expression; address the remote work environment; offer additional examples and guidance; and provide for more comprehensive training. This article discusses the most significant changes to the policy and training materials, with commentary from Evandro C. Gigante, partner at Proskauer. See “New York State Releases Final Anti-Sexual Harassment Model Policy and Training Materials” (Nov. 15, 2018).

Emerging Trends and Themes in the SEC’s Oversight of Private Funds

An expert panel at the Practising Law Institute’s program on hedge fund and private equity enforcement and regulatory developments explored hot SEC issues in the regulatory oversight of private funds, including the direction of insider trading cases, protections around material nonpublic information, valuation issues, cooperation standards and what the SEC may view as obstructive conduct. The panel was moderated by Gibson Dunn partner Barry R. Goldsmith and featured Morgan Lewis partner Kelly L. Gibson; King & Spalding partner M. Alexander Koch; Simpson Thacher partner Michael J. Osnato, Jr.; and WilmerHale partner Susan Schroeder. See “SEC Action and Commissioner Peirce’s Statement Shed Light on CCO Liability” (Aug. 25, 2022); and “SEC Risk Alert Reflects Growing Concerns About and Focus on Private Funds” (Feb. 24, 2022).

First Circuit Upholds SEC Injunction Against Short‑Selling Priest

Short sellers often issue reports critical of the companies in which they hold short positions. When those reports contain falsehoods about those companies, the SEC is likely to take notice. In 2014, Gregory Lemelson – also known as Father Emmanuel Lemelson – and Lemelson Capital Management, LLC (LCM) caused the hedge fund they managed to take short positions in Ligand Pharmaceuticals, Inc. (Ligand) and then allegedly made multiple false statements about Ligand in an effort to drive down its share price. Ligand alerted the SEC, which commenced a civil enforcement action against Lemelson and LCM. In what is likely to be the final chapter of the saga, the U.S. Court of Appeals for the First Circuit has upheld a jury verdict finding the defendants liable under Rule 10b‑5 under the Securities Exchange Act of 1934 and the trial court’s imposition of a five-year injunction against future violations. This article details the SEC’s allegations, the relevant aspects of the litigation and the First Circuit’s decision. See “SEC Alleges Short Selling Violations by Firm Whose Compliance Staff Misinterpreted Rule 105” (Jul. 28, 2022).

District Court Dismisses 16(b) Action Against Hedge Fund Adviser for Lack of Standing

Section 16(b) of the Securities Exchange Act of 1934 permits an issuer to recover short-swing trading profits from insiders and 10% beneficial owners. Applying the U.S. Supreme Court’s 2021 decision on standing in TransUnion LLC v. Ramirez, the U.S. District Court for the Eastern District of New York (District Court) recently held that the mere violation of Section 16(b) by a hedge fund adviser, without evidence of a “concrete injury,” did not confer standing under Article III of the U.S. Constitution. If TransUnion does govern actions under Section 16(b), it would upend long-standing Second Circuit precedent that a mere violation of Section 16(b) – without more – gives standing to bring an action. This article details the District Court’s decision and reasoning, with commentary from Thomas J. Fleming, partner at Olshan Frome Wolosky LLP, which represented the adviser in the action. See “Delegation of Investment and Voting Authority to a Fund’s Investment Adviser Does Not Shield the Fund From Liability for Short‑Swing Trading Profits” (Oct. 10, 2019).

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